Monday, March 11, 2013

Every Little Bit Helps... But It's Not Enough

Today's IEA speech by Doc Fox was a sharp reminder of how far we have strayed from the paths of fiscal righteousness. We have overspent, over-borrowed, and overtaxed. We have encouraged welfare dependency, and stifled the economic dynamism that made us rich. We have left undone those things we ought to have done, and done those things which we ought not to have done, and there is no health in us.

The question of course, is how do we put it right? And in particular, how do we get government spending down? The Doc makes a number of excellent suggestions, including the abolition of universal welfare benefits, and removal of the protective ring-fence around the NHS and foreign aid. But his big headline idea is a 3 or 5 year freeze on public spending, which he estimates would save us over £300bn.

Which sounds very appealing, but could it work?

A 5 year freeze would lop around £90bn off spending in 2017-18, or about 12% of what's currently planned. It would take spending in real terms back to the level it was in the middle of the last decade - mid-way through Labour's spending splurge. Given all those tens of billions of waste we blog about, that hardly sounds like it would destroy our public services, so maybe it could work.

Well, it could work if it was done right.

The wrong way to do it would be to freeze spending across the board and simply leave public sector bosses to figure out how to make the savings. That's known as "starving the beast", and although it has the attraction of simplicity, past experience tells us that a starved beast is much more likely to deliver waiting lists and terrible services, rather than efficiency and value.

A more promising approach is to cut spending by focusing directly on value-for-money: managing things better and getting more for less. That's the good housekeeping approach of every little bit helps, and it's pretty well what successive governments have been attempting for at least the last forty years.

Take government procurement spending. That's running at well over £200bn annually, and it has long been a target for efficiency savings. It was a major element in Brown's failed Gershon efficiency programme, and one of the Coalition's first acts was to commission retailer Sir Philip Green to identify procurement savings. The idea is that government (aka the Simple Shopper) bumbles around buying the wrong stuff at grossly inflated prices, so there must be huge scope for doing it better. And after his probe, Philip Green reckoned he could save £20bn pa just from central government procurement "without even breaking sweat".

But in practice, delivery of the savings always turns out to be very much more difficult than ministers are led to believe.

For example, the National Audit Office has recently given us an update on the Coalition's attempt to institute a systematic programme of central purchasing for central government departments. Although the"strategy is the most coherent approach to reform to date", the NAO reckons it's only actually saved £426m out of total spending of £45bn - a derisory 1%.

So why's it been so difficult? Because individual spending departments don't want to hand over their purchasing authority to a central agency under the control of the Cabinet Office. And in practice, there are precious few levers to make them do so. As the NAO notes:

"It is a
major programme of change for central government, with considerable shifts in behaviour
required within departments to ensure it meets its objectives. Its success will depend on
full participation among central government bodies, and it is important that the Cabinet
Office has in place appropriate governance structures to enable this shift in behaviours."

A shift in behaviours. Yes, that's certainly what's needed. But how do you get it? How do you get central government bureaucrats to prioritise saving money over departmental power? And if it can't even be done within Whitehall itself, how on earth can we expect to do it across the rest of the public sector, such as the NHS and local councils? Because the Coalition's centralised procurement programme only applies to central government departments, which account for less than one-fifth of total public sector procurement.

The reality is that every little bit will help, but to achieve the kind of savings the Doc has in mind will take something far more radical than either starving the beast or good housekeeping. It will take the kind of fundamental reform outlined in the book of BOM: downsize, decentralise, demonopolise, and deuniversalise. To get a real shift in behaviours we have to dismantle our hugely centralised welfare state, and introduce the spur of competition.

We don't suppose that's telling the Doc anything he doesn't already know. But we do wonder about some of his colleagues... well, quite a few of his colleagues actually.

6 comments:

Excuse me for being a thicko here, but how does centralising government procurement stack up with "the kind of fundamental reform outlined in the book of BOM: downsize, decentralise, demonopolise, and deuniversalise".

How can you devolve (decentralise) power to Councils and expect them to centralise procurement?

You might find the answers you are looking for here:http://www.cobdencentre.org/tag/new-zealand/New Zealand in the 80s found itself in a similar position to our own here. This article shows the radical steps they took to tackle it.

Believing in central purchasing involves exactly the same mistake as believing in socialism.

Talk to anyone in any large company about their experiences of moving purchasing from being local to being central, and you'll hear exactly the same stories of waste and delay as you hear about government procurement.

What *always* happens is that the people who want to get stuff done have to put in heroic efforts to subvert the new system: buying stuff on private credit cars where their managers will sign-off on expenses, or getting helpful local 'approved suppliers' to act as agents for them in purchasing stuff they need urgently and then invoicing it quietly on the bottom of another order.

A big (household name) engineering company recently centralised all their purchasing, based largely on a laughable test exercise involving obsolete items of stationery. Individual divisions of the group now claim their costs are up about 15%. All the locally negotiated deals are gone, all the goodwill from local suppliers is burnt, a tiny number of national hire companies now truck plant huge distances from *their* central depots for them, and their blokes no longer get to wear their preferred PPE because it's not stocked by Greenhams (or whoever it is on the current three-year contract).

It's a crap idea, and I wish we could persuade you, Wat.

Government procurement is crap because it's done by people who didn't earn the money they're spending. Putting the vast network of small businesses that supply local authorities into liquidation so that purchasing can be done solely through megacorps is an obscene idea. Drop it.

BOM the book now available

Drawing on six years of blogging government waste, this book shows how we spend far more than we need on our public services. It sets out the facts and explores the underlying issues. Just why does government spend so much and deliver such second rate service? Why do we put up with it? And what are the alternatives?

ABOUT BOM

Despite all the talk of cuts, government still consumes nearly half our national income. Yet many tens of billions of its spending is wasted, with taxpayers made to pick up the tab for a depressing array of overpriced sub-standard services. This is money we can no longer afford, and our National Debt is already at danger level.

If we're to avoid further decades of stagnation and austerity we urgently need to find another way. Exposing and understanding the wastefulness of government is a necessary step in the right direction.